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Will AT&T increase its dividend this year?



Will AT&T increase its dividend this year?

Before the pandemic disrupted its operations, AT&T (NYSE:T) was a reliable dividend stock. Not only that, it was also a dividend growth stock. For decades, the company has increased dividend payments, and in 2019 the company reached 36 consecutive years of quarterly dividend increases. When the pandemic hit, the company kept its dividend intact but did not increase the payout.

Then, after it spun off WarnerMedia in 2022, it adjusted (reduced) its payout to be more sustainable. But the company hasn’t increased its dividend since then, even though its business seems more stable and consistent. With the company’s results looking even better in 2024, could a dividend increase finally be on the horizon?

AT&T’s free cash flow continues to grow

An important number for dividend investors what you need to consider when looking at income stocks is free cash flow (FCF). This represents the operating cash flow a company has left after capital purchases. A dividend-paying company needs strong free cash flow to ensure it can balance its growth initiatives and dividend without worrying about raising additional funds.

Last year, AT&T’s free cash flow was $16.8 billion, slightly higher than the company’s expectations. By 2024, the telecom giant expects free cash to be even higher, between $17 billion and $18 billion.

On an annual basis, the company pays out approximately $8.2 billion in dividends. That means if AT&T hits the high end of its free cash flow expectations this year, it might pay out only 46% of its free cash flow as dividends. That’s not only sustainable, but also leaves the company plenty of room to potentially increase its current quarterly dividend of $0.2775.

Could there be a dividend increase this year?

Things are looking up for AT&T right now, as the company expects wireless revenue to grow about 3% this year and broadband revenue to grow at least 7%. It seems likely that AT&T can justify a dividend increase from a financial perspective.

But I don’t think the company is in a rush to make one. To start with the telecom stock already pays a dividend that yields 6.5% – more than four times higher than the S&P500 average 1.5%. Investors can already get great returns from AT&T stock, so there may not be a need to increase the dividend just yet.

Second, there isn’t much excitement around telecom and dividend stocks as a whole. With interest rates remaining high, investors have more ways to generate recurring cash flow than just buying dividend stocks, which are often riskier options than, say, bonds.

Since the beginning of 2022 (when interest rates started to rise), the iShares US telecommunications ETF has fallen by 34%. If AT&T announces that it will now increase its dividend again, it may not get much attention. It might be better if the company waited for interest rates to drop so dividend stocks could return to the spotlight.

Historically, AT&T has announced dividend increases toward the end of the year. If this happens this year, there could be one or two rate cuts by then and dividend stocks could recover. In that case, AT&T’s returns could shrink. If that happens, I think AT&T could announce a rate hike by December.

Should You Buy AT&T Stock Today?

If you’re a dividend investor looking for a good payout, AT&T could be a great stock to buy right now. There’s a good chance that stocks will start to rise once interest rates drop, and if you buy AT&T stock before that happens, you could get better returns.

Even if the dividend doesn’t increase this year, it may only be a matter of time before it does. The company’s strong financials make it likely that AT&T will increase its payouts again, but now may be the right time to do so. Now that the company is no longer involved in the streaming sector, its financials are in much better shape and should make for a solid long-term investment.

Should You Invest $1,000 in AT&T Now?

Consider the following before buying stock in AT&T:

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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has one disclosure policy.

Will AT&T increase its dividend this year? was originally published by The Motley Fool